Halifax Pact With Bank Of Scotland Is Reported

By SUZANNE KAPNER

Published: April 26, 2001

LONDON, April 25—
Bank of Scotland is in talks to merge with the Halifax Group, Britain's largest mortgage lender, the companies said today, the third time in a year the Scottish bank has tried to find a partner.

The deal would create a bank to rival some of the largest in Britain in terms of customers and market value. Based on Tuesday's closing share prices, the new group would have a market capitalization of £25.5 billion ($36.6 billion), of which Halifax would account for 63 percent.

After The Glasgow Herald reported that talks were under way, the companies released a statement that briefly outlined the merger, in which one share of Bank of Scotland would be exchangeable for one share of Halifax.

Several issues have yet to be decided, including who would run the combined company, people involved in the discussions said. Also at issue is whether to retain Bank of Scotland's Edinburgh headquarters, or run the new company from Halifax's West Yorkshire offices, in the north of England, these people said.

Should a deal be completed, Bank of Scotland's chief executive, Peter Burt, would finally gain the power he has been seeking. Halifax has 20 million customers and 800 branches, mostly in England, compared with Bank of Scotland's 5 million customers and 360 branches, mainly in Scotland.

For Halifax, a merger with Bank of Scotland would fall neatly into the plans of its chief executive, James Crosby, to diversify away from mortgages, which have been a drag on profits. As part of that process, Halifax has bought Equitable Life, St. James's Place Capital and several other asset management and insurance companies.

A combined Halifax and Bank of Scotland would control roughly a fifth of the British mortgage market, and a third of Scottish banking, analysts said.

''Twenty-five million customers is a monstrous number,'' said Andrei Ilyin, an analyst with Nomura International in London. ''When you think of the cross-fertilization of those customers, there is massive potential.''

Mr. Ilyin said he expected the combined company to save about £300 million by eliminating duplications in administrative functions, while increasing revenue by £250 million through the cross-selling of products.

Some shareholders questioned the companies' description of the deal, given that Halifax is so much larger.

''To call it a merger is disingenuous,'' said Brian Moretta, a fund manager with Scottish Value Management, which owns shares of Bank of Scotland and Halifax. ''Halifax is in effect buying Bank of Scotland for no premium.''

''Bank of Scotland wants to do a deal with somebody,'' he continued. ''But I'm beginning to wonder if they're willing to do a deal with anybody.''

People involved in the talks said the companies were classifying the deal as a merger to avoid recording large good-will charges, which can drag down net income. British accounting rules allow for this, they said, provided that no cash changes hands, that executives from both companies sit on the new board and that the ratio of the market values of the companies does not greatly exceed 60 percent to 40 percent.